Why SoundCloud's $700 Million Valuation Matters
SoundCloud, a music-sharing service founded in 2007, raised more than $60 million from Institutional Venture Partners and the Chernin Group, according to The Wall Street Journal. The round closed last year but had not been previously announced.
At $700 million, SoundCloud's valuation puts it within arm's reach of the Billion Dollar Valuation Club. It's also noteworthy that the Germany-based company is in discussions to license songs from major record labels. The latter scoop comes via Re/Code's Peter Kafka, who says that was the reason the news was kept under wraps until now.
In many ways, SoundCloud, which lets anyone upload original and remixed music, started off in the same boat as YouTube. It was, as Kafka puts it, a "free-for-all," where any would-be musician or DJ could add a song regardless of whether or not it was copyrighted. Over time, however, SoundCloud matured, raising $10 million in a funding round led by Index Ventures and Union Square Ventures last year.
That round of financing called greater attention to the questionable legality of SoundCloud's content. With its latest round, the company may now be able to rid itself of such issues by paying to license music.
The Substitute for Spotify?
It may be hard to understand what prompted the high valuation or why it's relevant to your business. But the answer is simple: SoundCloud has established incredible reach by giving consumers something they want for free (if through unorthodox means).
Whereas other music startups based in Europe have done well abroad but have failed to catch on in the U.S., SoundCloud has gotten traction on both sides of the Atlantic. It has also won many celebrity users: Deadmau5, a cult figure among millennials into electronic dance music, has held contests on the site inviting fans to remix his tracks, while Beyoncé is known to put rare and unreleased remixes on her page, drawing hundreds of thousands of clicks.
Another reason venture capitalists might find SoundCloud so attractive is because of its appeal to users as a Spotify substitute, says Matt Pincus, founder of Songs Publishing, a music publishing firm. Unlike Spotify and other startups with licensing deals, SoundCloud doesn't require paid subscriptions for unlimited streaming.
Of course, one reason SoundCloud has been able to avoid subscription fees is that not all its music is legal. David Pakman, a venture capitalist and the former CEO of online music store eMusic, says that may result in serious costs for the startup now that it has been valued in the hundreds of millions of dollars. "Given their size, they have no choice now but to get their massive amount of infringing music licensed," he told me. In other words, SoundCloud's recent round of funding was nothing more than a "wealth transfer from VCs to record labels."
JILL KRASNY | Staff Writer
Jill Krasny is a staff writer for Inc. magazine, where she covers the intersection of entertainment and startups. Prior to Inc., she was a writer for MTV and Esquire and an editor at TheStreet. She is a graduate of the University of Southern California with a degree in communication. She lives in New York City.